Strategy & Competition October 29, 2009, 5:00PM EST

The Biggest Bet in Vegas

(page 2 of 2)

Murren had to scramble to raise funds to continue construction, including selling MGM's Treasure Island casino and raising $1 billion in a new stock offering. Through it all, he says, Kerkorian reassured him and took the younger man under his wing. He told Murren to make sure to spend more time with his wife and nagged him to get enough exercise to relieve stress. Murren says the 92-year-old investor is convinced that both Las Vegas and CityCenter will thrive.

Yet CityCenter's opening comes at a time when MGM is still vulnerable. The company's cash flow has slid from about $2.4 billion in 2007 to an estimated $1.4 billion this year. With $5.8 billion in debt coming due in 2011, MGM is in danger of default if profits slide further, says Michael Paladino, a casino analyst at Fitch Ratings. On Oct. 20 the company took a $1 billion write-off on CityCenter. Kerkorian announced on the same day that he's considering "strategic options" for his 37% stake in MGM. Valued at $15 billion two years ago, his shares are worth $1.6 billion today. Kerkorian said in a filing that he is considering bringing in outside investors to unlock "substantial unrecognized value." Analysts speculate that he may be trying to drum up interest in the company's beleaguered stock, which is now at about $9.60.

OLD-SCHOOL VEGAS

The immediate priority is making sure that CityCenter's rooms are filled once it starts opening its doors. In October, MGM sent teams of sales people out to visit meeting planners around the country. Part of their pitch: Vegas is suddenly the great value-for-money destination. Moreover, they're also being told to say, booking an event at CityCenter is good for the economy because the project is creating 12,000 jobs.

Many think the days of $1,000-a-night suites and $400 bottles of tequila are over, with Vegas likely to return to its roots, offering cheap rooms and all-you-can eat buffets. "We were Bargain City, U.S.A.," says William Thompson, a professor of public administration at the University of Nevada at Las Vegas and a longtime observer of the casino business. Timothy Arnold, a meeting planner in Dallas, just booked a group of 150 at the Bellagio next door to CityCenter for $129 a night—with free meeting space. "Vegas is so full of deals now that I'm directing a lot of my clients there."

For MGM, the challenge is to make sure those clients are profitable. Its four-star MGM Grand, down the street from CityCenter, offers $79 rooms with $35 in food credits. Murren says that kind of bargain makes Vegas irresistible: "Doesn't it make you feel lucky?" But Alex Yemenidjian, a former president and COO of MGM who remains close to Kerkorian, says Murren is in a tough spot: "This is the very first time that Vegas finds itself with supply increasing while the market is contracting."

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau. Follow him on Twitter @chrispalmeri .

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